On Wednesday 8 October, the UK Financial Conduct Authority (FCA) published the 80^th edition of Market Watch, its newsletter on market conduct and transaction reporting issues.

In the edition, the FCA outlines its observations on what firms can do to ensure compliance with SYSC 6.1.1R when dealing for overseas clients who operate aggregated accounts that provide no visibility of the ultimate beneficial owners (UBOs).

A summary of the FCA’s newsletter is provided below.

1. Observations

• Potential market abuse in leveraged equity products from aggregated accounts administered by firms based overseas has increased; specifically, in countries where the regulatory approach to preventing market abuse may not be equivalent to that supervised by the FCA.
• FCA-authorised firms are unknowingly transacting trades for individual UBOs, through obfuscated overseas aggregated accounts (OOAAs - accounts where the identities of UBOs who determine their own investments are unknown to FCA-authorised firms), who have had their own trading accounts at those FCA-authorised firms terminated owing to suspected market abuse.
• Where authorised firms are not able to identify the UBOs of the trades described in STORs, they may not be able to reliably detect patterns of repeated suspicious trading, which should normally lead to enhanced monitoring and account termination.

2. What firms can do

• Take extra precautions when onboarding and trading with OOAAs, including modifying risk frameworks and thresholds for offboarding.
• Inform OOAAs that the firm operates a zero-tolerance approach to market abuse.
• Have an open relationship with the firm’s regulators.
• Submit STORs for every suspicious trade.
• Liaise with other law enforcement agencies and overseas regulators as appropriate.
• Do not hesitate to end relationships, including corporate relationships, if trading falls outside the firm’s risk tolerance.  
• Require prospective and existing OOAAs, which execute for anonymised UBOs, to provide information about their systems and controls to prevent market abuse, such as:
  • A description of market abuse surveillance arrangements, risk tolerance and risk framework, including thresholds within that framework for taking steps to manage risks such as terminating accounts;
  • The nature of underlying clients (e.g. individuals, retail, professional, High Net Worth and corporate);
  • The number of clients that are deemed high risk and how these are identified; and
  • Confirming whether OOAAs will provide the identities of relevant UBOs, if the FCA-authorised firm is concerned about particular trades.
• Where the identities of individual UBOs are masked, ask OOAAs to differentiate between trades for those UBOs by assigning each with a sub-account with a unique identifier code. Then, require the administrator not to route through them further trades from identified sub-accounts which fall outside the firm’s risk tolerance.
• Apply robust measures to end entire OOAA relationships where appropriate.

If you have any questions, please contact Aniqah Rao.